Asset
Anything of value owned by a person or a firm
Financial Asset
An asset that represents a claim on someone else for a payment
Security
A financial asset that can be bought and sold in a financial market
Financial Market
A place or channel for buying or selling stocks, bonds, and other securities
Money
Anything that is generally accepted in payment for goods and services or to pay off debts
Money Supply
The total quantity of money in the economy
Stock
Financial securities that represent partial ownership of a firm; also called equities
Dividend
A payment that a corporation makes to its shareholders
Bond
A financial security issued by a corporation or a government that represents a promise to repay a fixed amount of money
Interest Rate
The cost of borrowing funds (or the payment for lending funds), usually expressed as a percentage of the amount borrowed
Foreign Exchange
Units of foreign currency
Securitization
The process of converting loans and other financial assets that are not tradable into securities
Financial Liability
A financial claim owed by a person or a firm
Financial Intermediary
A financial firm, such as a bank, that borrows funds from savers and lends them to borrowers
Commercial Bank
A financial firm that serves as a financial intermediary by taking in deposits and using them to make loans
Portfolio
A collection of assets, such as stocks and bonds
Primary Market
A financial market in which stocks, bonds, and other securities are sold for the first time
Secondary Market
A financial market in which investors buy and sell existing securities
Federal Reserve
The central bank of the United States; usually referred to as "the Fed
Monetary Policy
The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives
Federal Funds Rate
The interest rate that banks charge each other on short-term loans
Diversification
Splitting wealth among many different assets to reduce risk
Risk Sharing
A service the financial system provides that allows savers to spread and transfer risk
Liquidity
The eaee with which an asset can be exchanged for money
Information
Facts about borrowers and expectations of returns on financial assets
Financial Crisis
A significant disruption in the flow of funds from lenders to borrowers
Bubble
An unsustainable increase in the price of a class of assets
Barter
A system of exchange in which individuals trade goods and services directly for other goods and services
Transactions Costs
The costs in time or other resources that parties incur in the process of agreeing and carrying out an exchange of goods and services.
Commodity Money
A good used as money that has value independent of its use as money
Specialization
A system in which individuals produce the goods or services for which they have relatively the best ability
Medium of Exchange
Something that is generally accepted as payment for goods and services; a function of money
Unit of Account
A way of measuring value in an economy in terms of money; a function of money
Store of Value
The accumulating of wealth by holding dollars or other assets that can be used to buy goods and services in the future; a function of money
Standard of Deferred Payment
The characteristic of money by which it facilitates exchange over time; a function of money
Wealth
The sum of the value of a person's assets minus the value of the person's liabilities
Fiat Money
Money, such as paper currency, that has no value apart from its use as money
Legal Tender
The government designation that currency is accepted as payment of taxes and must be accepted by individuals and firms in payment of debts
Payment System
The mechanism for conducting transactions in the economy
Check
A promise to pay on demand money deposited with a bank or other financial institution
E-Money
Digital cash people use to buy goods and services over the Internet; short for electronic money
Money Aggregate
A measure of the quantity of money that is broader than currency; M1 and M2 are monetary aggregates
M1
A narrow definition of the money supply: The sum of currency in circulation, checking account deposits, and holdings of traveler's checks
M2
A broader definition of the money supply: all the assets that are included in M1, as well as time deposits with a value of less than $100,000, savings accounts, money markets deposit accounts, and non institutional money market mutual fund shares
Quantity Theory of Money
A theory about the connection between money and prices that assumes that the velocity of money is constant
Hyperinflation
Extremely high rates of inflation, exceeding 50% per month
Future Value
The value at some future time of an investment made today
Compounding
The process of earning interest on interest, as savings accumulate over time
Present Value
The value today of funds that will be received in the future
Time Value of Money
The way that the value of a payment changes depending on when the payment is received
Discounting
The process of finding the present value of funds that will be received in the future
Debt Instruments
Methods of financing debt, including simple loans, discount bonds, coupon bonds, and fixed payment loans
Credit Market Instruments
Methods of financing debt, including simple loans, discount bonds, coupon bonds, and fixed payment loans
Fixed-Income Assets
Methods of financing debt, including simple loans, discount bonds, coupon bonds, and fixed payment loans
Equity
A claim to part ownership of a firm; common stock issued by a corporation
Simple Loan
A debt instrument in which the borrower receives from the lender an amount called the principal and agrees to repay the lender the principal plus interest on a specific date when the loan matures
Discount Bond
A debt instrument in which the borrower repays the amount of the loan in a single payment at maturity but receives less than the face value of the bond initially
Coupon Bond
A debt instrument that requires multiple payments of interest on a regular basis, such as semiannually or annually, and a payment of the face value of maturity
Fixed-Payment Loan
A debt instrument that requires the borrower to make regular periodic payments of principal and interest to the lender
Yield to Maturity
The interest rate that makes the present value of payments from an asset equal to the asset's price today
Capital Gain
An increase in the market price of an asset
Capital Loss
A decrease in the market price of an asset
Financial Arbitrage
The process of buying and selling securities to profit from price changes over a brief period of time
Return
The total earnings from a security; for a bond during a holding period of one year, the coupon payment plus the change in the price of the bond
Rate of Return, R
The return on a security as a percentage of the initial price; for a bond during a holding period of one year, the coupon payment plus the change in the price of a bond divided by the initial price
Interest-Rate Risk
The risk that the price of a financial asset will fluctuate in response to changes in market interest rates
Nominal Interest Rate
An interest rate that is not adjusted for changes in purchasing power
Real Interest Rate
An interest rate the is adjusted for changes in purchasing power
Deflation
A sustained decline in the price level
Expected Return
The rate of return expected on an asset during a future period
Risk
The degree of uncertainty in the return on an asset
Market Risk
Risk that is common to all assets of a certain type, such as the increases and decreases in stocks resulting from the business cycle
Systematic Risk
Risk that is common to all assets of a certain type, such as the increases and decreases in stocks resulting from the business cycle
Idiosyncratic Risk
Risk that pertains to a particular asset rather than to the market as a whole, as when the price of a particular firm's stock fluctuates because of the success or failure of a new product
Unsystematic Risk
Risk that pertains to a particular asset rather than to the market as a whole, as when the price of a particular firm's stock fluctuates because of the success or failure of a new product
Fisher Effect
The assertion by Irving Fisher that the nominal interest rises or falls point-for-point with changes in the expected inflation rate
Closed Economy
An economy in which households, firms, and governments do not borrow or lend internationally
Open Economy
An economy in which households, firms, and governments borrow and lend internationally
Small Open Economy
An economy in which the quantity of loanable funds supplied or demanded is too small to affect the world real interest rate
Large Open Economy
An economy in which changes in the demand and supply for loanable funds are large enough to affect the world real interest rate